How did Warren Buffett generate most of his wealth?

S&C Messina Capital invests in P&C insurance companies, such as Berkshire Hathaway, that have demonstrated the rare ability to continuously compound shareholder value at above-industry rates for decades.

Our investment strategy aims to deliver the following:

A. Long-term compoundinG

Investing in P&C insurance companies enabled Buffett to compound his investments over a long period of time on a levered basis, juicing his returns. For every $1 dollar invested in a P&C insurer, he was able to get at least another $1 funded by insurance premiums, which in aggregate gave him $2 of total assets under management. When Buffett's aggregate investments went up 5%, he actually got a 10% return on his own money. Year after year. Last but not least, Buffett also got a kicker to his already juiced investment returns with the addition of underwriting profits. This further boosted the above 10% return into the 15-20% range. Year after year.



Because P&C insurers allocate a significant portion of their assets to high-quality bonds, they provide their stockholders like Buffett with inherent downside protection. Remaining assets are invested in highly liquid equities and cash. Unlike investments made by most operating companies in depreciating capital equipment, R&D, inventory and other sunk costs, investments in marketable securities retain value on the balance sheet until they are redeemed at maturity or sold at prevailing market prices. These investments are owned by the P&C insurer just like a mutual fund would own bonds and stocks. Furthermore, if a P&C insurer is underwriting profitably, it does not have to subsidize its underwriting losses with forced investment sales; it can put itself in a position to hold a portion of its investments in compounding equities ad infinitum.



When Buffett invested in a P&C insurer, he gained exposure to insurance risk, which has very little correlation with financial markets. This lack of correlation of insurance risk is highly attractive in two ways: first, as a source of additional, non-correlated returns and, second, as a source of non-recourse, non-correlated funding. All of these benefits work in tandem to generate a higher base of non-correlated returns for investors in P&C insurance companies, but only if underwriting is consistently profitable.

Additional, non-correlated returns: Underwriting profits provide incremental returns via the successful management of insurance risk that has little correlation with investment returns achieved by P&C insurers in their bond and stock portfolios.

As mentioned above, insurance premiums partially fund investment purchases made by P&C insurers, increasing their AUM and juicing their investment returns.

Non-recourse funding: As long as underwriting is consistently profitable, the providers of this premium funding, i.e. the policyholders, have no recourse to the assets purchased with the premiums they paid. Contrast this with traditional debt and margin providers who have full recourse to investments purchased with their capital, having the ability to force liquidations and issue margin calls when the value of their collateral falls too low. 

Non-correlated funding: Credit conditions and investor appetite have little bearing on the amount of insurance premiums available for funding investment purchases. P&C insurers can continue to source premium funding and invest when access to (borrowed) capital has become non-existent for most investors, during credit crunches and equity sell-offs, exactly when investments are most attractively valued.

All of the above non-correlated yet return-enhancing benefits can be enjoyed by a P&C insurer if it underwrites profitably. However, very few P&C insurers underwrite profitably on a consistent basis.



Our expertise consists of finding the select few P&C insurance carriers that will underwrite profitably on a consistent basis for many years to come. By doing so, we will be owning companies that have put themselves in the best possible position to enjoy the 3 benefits mentioned above that made Berkshire Hathaway immensely successful and Warren Buffett the wealthiest individual of our generation.

Nevertheless, for almost all of the past 38 years, NICO has been a star performer. Indeed, had we not made this acquisition, Berkshire would be lucky to be worth HALF of what it is today.
— Warren Buffett, 2004 annual letter, referencing Berkshire's purchase of its first insurance company NICO for $8.6 million in 1967. Berkshire is worth almost $400 billion today.